How a personal loan for a roof works
In a nutshell, a personal loan is money you borrow from a lender and repay with interest. Personal loans are typically paid in equal monthly installments, and because the interest rate is almost always fixed, you never have to worry about the monthly payment changing.
Most personal loans can be used for almost any purpose, including a new roof. When we refer to a "new roof loan," we're really talking about a personal loan that is used to pay for the roof.
Pros and cons of personal loans
Before applying for a personal loan, it pays to carefully consider each pro and con -- here are the pros:
- Many personal loan lenders allow you to borrow as much as $50,000 to $100,000, far more than you should need.
- Most personal loans are unsecured, meaning you don't have to risk anything of value.
Here are a few strikes against a personal loan:
- You pay interest on the loan, and if your credit score is low, your interest rate may be higher than expected.
- You'll have a new monthly payment to work into your household budget.
Depending on how you weigh these pros and cons, a personal loan for a new roof may or may not be the best fit for your finances.
Getting a low-interest new roof loan
Ideally, if you decide to take out a personal loan to pay for your new roof, you'll score the lowest possible interest rate. Getting a low rate depends on many factors, including the following.
Your credit score
Borrowers with the highest credit scores typically qualify for the lowest available rates. If your score is lower than you would like, consider borrowing the money from a lender that allows cosigners.
Here's how a cosigner works: You ask someone with a high credit score to sign onto the loan with you. You make the monthly payments as you would if you were the only name on the loan. However, when determining creditworthiness, the lender considers the cosigner's credit history when making its decision.
Employment and income
Lenders want to know that you earn enough money each month to repay the loan. If you can't provide proof of employment and income, you'll likely have a tough time getting loan approval. However, a positive employment history and adequate earnings may score you a lower interest rate.
Fixed or variable interest rate loan
With a fixed-rate loan, you know what your monthly payment will be because the interest rate never changes. Variable rates, on the other hand, can go up and down over time. The personal loan interest rate on variable-rate loans usually starts lower than that of a fixed-rate loan. However, if rates increase, you could find yourself with a loan you can't afford.
Secured or unsecured
If you take out a secured personal loan, you put an asset of value, such as your home or car, up as collateral. While most personal loans are unsecured, it's possible you'll benefit by finding a lender that offers secured loans. When a lender knows it can repossess collateral if you miss payments, it worries less about losing money on the loan and may offer a more attractive interest rate.
Your repayment timeline
If you borrow money over a longer period of time, there's more risk to the lender and you may be required to pay a higher interest rate. Shorter-term loans often carry a lower rate.
How to apply for a new roof loan
1. Decide how much you need to borrow
Since you pay interest on the amount of money you borrow, it's generally best to borrow the smallest amount possible any time you take out a loan.
2. Check your credit score
Each lender sets its own minimum required credit score. Before going through the hassle of applying for a loan, check your score. The higher the score, the lower the interest rate you're likely to be offered.
3. Determine if you need a cosigner
If your credit score is low, decide whether you want to ask someone with a high score to cosign. One thing to keep in mind is that your cosigner will be on the hook for making any payments you miss and their credit score will be negatively affected by late or missed payments -- the same as yours.
4. Shop around for a lender
Take the time to compare multiple lenders. There are plenty of reputable online loans available, as well as loans from brick-and-mortar institutions. Because each lender has its own lending criteria, you never know where you might find the best offer.
5. Prequalify
Once you decide which of the lenders you checked best fits your needs, go through the prequalification process with at least three of them. Most lenders will ask you to provide basic information, such as:
- Your name
- Address
- Place of employment
- How much you want to borrow
- And possibly, the amount of your rent or mortgage payment
6. Compare prequalified offers
Prequalifying for a loan means the lender believes you're a good candidate and are likely to make it through the loan approval process. Once you've heard back from all lenders, compare their offers and decide which one you want to work with.
7. Fill out a full loan application
The significant difference between a full loan application and the application you fill out to prequalify is the amount of information you'll be asked to provide. As an example, lenders will likely want to see proof of income and a list of your monthly debt payments.
8. Await final word and funding
Once your application goes through underwriting, the lender will let you know if it's been approved. At this point, it's time to read the loan contract carefully and ask for clarification if there's anything you don't understand. Finally, you'll sign the loan agreement and wait for money to hit your bank account.
